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The Titanium Age Lower-cost processes, latent demand

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The effects of the recession appear to be easing in the titanium industry, raising hopes of recovery. At the same time, new opportunities are presenting themselves that could lead to the availability of lower-cost titanium products in a number of applications previously priced out of titanium. Thus, the recovery may coincide with a somewhat transformed business landscape.

The titanium industry, like many others, was battered by the economic downturn. The faltering of the economy in late 2008 was preceded by a falloff in titanium prices well before, partly due to delays in titanium-intensive programs at Boeing Co. and Airbus SAS.

The onset of the recession merely exacerbated existing conditions in the aerospace sector, which initially declined more dramatically than other sectors and depressed scrap markets to the point that in some places alloy scrap was less expensive than CP scrap. Scrap became a very depressed market in the recession partly because prices were so low, leading some suppliers to choose to hang on to supplies until prices rebounded. This helped to slow down the plunge in scrap prices, a trend that was not duplicated in other markets, like melt products.

Prices overall continued their slide and have remained depressed. For some products, 2009 prices were nearly 80 percent below their 2006 highs. In contrast to 2007 and 2008, when titanium facilities were running at more than 90 percent of capacity, in 2010 those same plants have been running at roughly 65 percent of capacity and in some cases at less than 50 percent. Even in China, where capacity was expanding rapidly a few years ago, plans for new facilities have been scrapped and some existing facilities shut down.

Research for a recent study by Thintri Inc. indicates that a recovery is indeed under way. Driven largely by the reactivation of Boeing and Airbus programs, demand for 6 aluminum/4 vanadium alloy has improved significantly this year. For example, in mid-2010 the price for alloy plate was above $30 per pound for thicknesses under 1 inch, up nearly 15 percent from a year earlier.

At this point, however, the recovery is spotty. Some suppliers have seen no turnaround at all and a few question its existence. Others have noted an apparently sustained increase in demand, with rising prices and extended lead times.

Overall, the Thintri survey of prices for products ranging from sponge to plate appears to confirm a real recovery that can be expected to continue and broaden, barring unexpected issues in the greater economy.

The change in market activity is especially pronounced in scrap. Titanium scrap differs from other types of scrap metals in that it is generated primarily during manufacturing rather than recovered from later-stage products like automobiles, ships, etc. For that reason, scrap availability depends on the percentage of scrap resulting from manufacturing. Aerospace has a uniquely high "buy-to-fly" ratio, with up to 80 percent of the titanium consumed ending up as scrap. Thus, the slump in aerospace had an inordinate effect on scrap prices, which softened considerably in 2007 and 2008 but have rebounded rapidly this year. To the extent that scrap prices are an early indicator of overall industry activity levels, the turnaround in scrap prices in recent months is indeed a positive sign.

One prime question relating to the current rebound is how much of the activity is actual growth in demand and how much is just restocking of inventory that was gradually depleted during the recession. At the moment, while there is no question that some percentage of the recovery is in fact restocking of inventory, it is equally clear that a real recovery is going on, primarily in aerospace but in other sectors as well.

While almost no one believes titanium prices will reach their peak levels of 2006 anytime soon, a number of industry participants in the Thintri survey believe that titanium shipments may reach the volume levels of that time. There is a growing industry consensus that if nothing out of the ordinary occurs, such as an unexpected economic crisis, a conservative projection would allow for a steady, positive growth rate throughout the next five years. Prices have already turned around and lead times have increased significantly. Assuming the economy continues a relatively modest recovery and resists a double-dip recession, prices and demand, as well as capacity utilization, can confidently be expected to continue growing for several years.

Another positive aspect of the current economic situation is that an aerospace "dip" or slump in aircraft construction widely anticipated for 2012, based on nothing more than historical cycles, will probably not occur. That short-term decline has already occurred, ahead of schedule, in the opinion of most industry players, making continued, uninterrupted growth more likely.

Renewed activity by Boeing (primarily with the 777 and 787) and Airbus (A350 and A380) are largely driving the current recovery, at least in its early stages. The sequence of events has been contrary to what was expected by industry participants as recently as last year. At that time, most in the titanium business expected the aerospace market to recover in pace with the general economy, but today the aerospace market is clearly leading the recovery and other markets are following.

Pushed (or pulled) by aerospace activity, other titanium markets are seeing upticks in activity, much of it outside North America. Power generation and desalinization projects, added to expanding offshore oil and gas exploration and new mining activities, together offer promise for a range of titanium products.

Other established markets, like medical and defense applications, offer a mixed picture. Medical markets, generally a source of stable growth and somewhat resistant to the ups and downs of the economy, most likely will continue at a reasonable pace, given the aging of the baby boomer generation. Defense, however, looks less promising as a consumer of titanium than it did a few years ago, given likely cuts in defense budgets. Chemical processing, a major demand driver for CP in normal times, will probably recover a little later, when the construction of chemical processing facilities rebounds.

Broader trends, like increased energy consumption in Asia, argue strongly in favor of rising oil prices, which will certainly lead to more exploration and drilling, which in turn will boost demand for titanium in the oil and gas sector. While oil has averaged about $78 per barrel so far this year, conservative economic estimates project oil at $100 per barrel within a few years, with some going as high as $170 per barrel. In some parts of the world, the use of liquefied natural gas (LNG) carriers, which use titanium plate heat exchangers, is growing rapidly.

Against the backdrop of the recovering titanium business, new technologies developed in the past few years have emerged that promise to bring titanium to new applications and expand existing markets.

Certainly in the current economic climate, low prices for titanium products have not led to increased demand and new markets, the reason being that the real issue is cost relative to demand. As the economy recovers and demand rises, prices will again increase, and a number of promising applications that could dramatically benefit from titanium will still have to use inferior materials due to the relatively high cost of titanium.

However, new low-cost processes, some of which are already commercially available, do offer the promise of reducing costs significantly.

After a surge in the past decade in the number of low-cost titanium processes under development, many have since been abandoned or delayed but several are ongoing and showing promising results. Initially, most efforts were concentrated on replacing the costly and inefficient Kroll process with another method that would provide raw materials that could, for example, replace sponge with another form extracted more immediately from ore. While some such efforts continue and are showing promise, the more substantial gains today appear to be in methods that provide for improved performance on established processes.

Methods that provide titanium powder, which could substitute for sponge and be used to fabricate a broad range of titanium products, including rolled products, probably offer the greatest potential for cost reduction, some of which may be commercially available soon. Today these methods remain somewhat controversial, with disputed claims on cost, quality, purity and performance, but in some cases proponents claim to be near proving their case.

However, there are other techniques, already commercialized or very close to commercialization, that are proven to bring about significant cost reductions later in the process chain. For example, techniques for machining titanium, and casting forms that provide titanium at costs approaching or matching those of aluminum or steel, are now available, with more on the way. Soon, rolling mills providing milled products at reduced cost over what is available today will likely be online. Rather than being revolutionary, some of these methods are simply evolutionary, and the result of years of development.

Consequently, the broader economic recovery offers opportunities to capture entirely new markets and expand established ones if those opportunities are recognized and grasped.

Satisfying this latent demand will require reliable, sustainable supplies as well as low prices. For example, titanium has established a beachhead in the automotive market (particularly with trucks, where it is used widely in turbocharger compressor wheels), but this relatively small market could become enormous were titanium parts to become available at low cost while avoiding supply issues.

In some applications, like chemical processing, where titanium is already used where needed simply because there are no alternatives, lower-cost titanium will have relatively little impact.

J. Scott Moore is president of Thintri Inc.

(www.thintri.com), a New York-based consulting firm, and the author of The Titanium Age Markets, Low Cost Processes and Latent Demand, a study recently published by Thintri. Moore received a doctorate in materials engineering from Rensselaer Polytechnic Institute and founded Thintri after working in industry for 13 years. The Titanium Age attempts to paint a picture of titanium markets and their evolution over the next five years and evaluates latent demand in such markets as the automotive, consumer, industrial (including oil and gas, and mining), aerospace, defense and medical sectors.

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